$700 Billion Bailout

[southsider2k5]

Again, you are under the false assumption that not giving them a check with free reign will destroy all banks.

 

Not giving them checks will destroy most banks. It is not a false assumption, no matter how many times you repeat it. All you have to do is look at the period of time leading up to this and how many huge banks were already failing.

 

Exactly how would the problem have been solved with more regulations instead of money?

[Texsox]

Exactly how would the problem have been solved with more regulations instead of money?

Please correct my economic ignorance.

 

If you are giving the money to the bank for a specific reason, doesn't it follow that the banks should use it for that specific reason? That doesn't seem like regulation, it seems like common sense. I didn't hear we need to give the banks money so the investors could be made whole as quickly as possible, but maybe I missed that. I thought that was one of the fundamental differences between savings (which are FDIC insured) and most investments the only guarantee is the SEC will try and keep the playing field level and fair.

[NorthSideSox72]

Ugly. God I hate this regulatory system. This is just a joke right? The Washington Post was bought out by the Onion yesterday?

That article is misleading, and full of misunderstandings of the way stock dividends work.

 

First example: this article is playing games with accounting. They are saying that this bailout money is being paid to shareholders, as if it was some sort of a transfer. This is not at all the case. Using this type of logic, you could also say that the bailout money is going to paying janitors, or to purchasing paint for office walls, or literally any other expense for the bank in question. So saying that this is bailout money being given to shareholders is disingenuous.

 

Second example: the article forgets the key fact that the stock price of the bank is highly relevant to its financial state, and that financial state is highly correlated to their ability to lend money. When a company elects to stop paying dividends on its stock, after doing so previously, the stock price WILL tank. Its only a question of how much. You are then removing capital from the bank, offsetting whatever gains you had from the bailout money to begin with, and now you can't lend.

 

There are other examples, but those stuck out to me.

 

Now, I am NOT defending the bailout package in its entirety. I think overall it was a good idea, but, it lacked the rules and structure necessary to work well. The money should have come with legal caveats as to using it - certain percentages needed to be DIRECTLY used for lending, for example. But, just so we all understand, you could not possibly expect that number to be 100% or really anywhere near it. If they can actually, in the short run, lend out 25% of it, then I'd be ecstatic. The rest is a LONG TERM investment in the health of the system, which ultimately will lead to a stronger credit market.

 

[southsider2k5]

Please correct my economic ignorance.

 

If you are giving the money to the bank for a specific reason, doesn't it follow that the banks should use it for that specific reason? That doesn't seem like regulation, it seems like common sense. I didn't hear we need to give the banks money so the investors could be made whole as quickly as possible, but maybe I missed that. I thought that was one of the fundamental differences between savings (which are FDIC insured) and most investments the only guarantee is the SEC will try and keep the playing field level and fair.

 

Without investers, the banks don't exist anyway, because they are in bankruptcy.

[mr_genius]

Not giving them checks will destroy most banks. It is not a false assumption, no matter how many times you repeat it. All you have to do is look at the period of time leading up to this and how many huge banks were already failing.

 

Exactly how would the problem have been solved with more regulations instead of money?

 

Giving these banks money to do whatever they want with it does not help the economy or financial institutions. If they want a big handout, there are also strings that need to be attached as ANY major share holder (the government is now this major investor) would demand if investing this amount of capital. Yes, I believe it is a false assumption that the entire banking industry would collapse if these institutions we just gave 700 billion to, people whom mis-managed these companies, have to report to their new owners.

 

I think this debate is at the point where all we can do is watch what unfolds, time will tell if the bailout structure was appropriate.

 

.

Edited October 30, 2008 by mr_genius

[Dick Allen]

I was actually going to use it on hookers and coke. Anyone got any better ideas?

quaaludes and gin

[southsider2k5]

Giving these banks money to do whatever they want with it does not help the economy or financial institutions. If they want a big handout, there are also strings that need to be attached as ANY major share holder (the government is now this major investor) would demand if investing this amount of capital. Yes, it is a false assumption that the entire banking industry would collapse if these failures we just gave 700 billion to, people whom manage these companies, have to report to their new owners.

 

I think this debate is at the point where all we can do is watch what unfolds, time will tell if the bailout structure was appropriate.

 

.

 

You seem to have the basic assumption that if the banks are going to use the money for anything else but lending, that is wrong. The fact is that there are beause of Depression era banking laws and modern stupidities such as Sarbanes Oxley, there are more things to consider than just lending. If a banks capitalization falls too low, investors panic, sell, and it fails. If a bank doesn't have enough capital reserves to cover a specified percentage of assets, it fails. If value of assets fall to too low of a ratio as related to money lent out, it fails. It's not nearly as simple as people are trying to make it out to be.

 

Sure it would have been great to have years to reform things the way they should have been done since the 1930's, but the fact remains, that at the rate that major financial institutions were failing, there wasn't time to waste. It's not like we were talking about Mom and Pop's bank down the street. The 4th largest investment bank in the United States failed. Most other banks have assets with other banks to fulfill their own reserve requirements. Banks are very interconnected. If the largest banks on the planet were starting to fail, it was time for action. That seems pretty obvious to me anyway. The whole idea of all of these "regulations" that you keep referring to making some sort of a difference is a myth. Places all over the world that are MUCH more heavily regulated than the US have been failing or getting governmental bailouts. Britian, Iceland, France, German, and Russia are places that come to mind right away. Please tell me what exact regulation has most of the world been missing that would have prevented this?

[Texsox]

Without investers, the banks don't exist anyway, because they are in bankruptcy.

 

I understand this, but are we now going to guarantee investments? That seems like a dangerous path to be on.

[southsider2k5]

I understand this, but are we now going to guarantee investments? That seems like a dangerous path to be on.

 

We have been doing this for about 80 years now. It has been a dangerous path to be on since the beginning. Look at all of the government intervention and spending it has gotten us. This bailout is yet another function of the government making sure that nothing bad can ever happen.

[NorthSideSox72]

You seem to have the basic assumption that if the banks are going to use the money for anything else but lending, that is wrong. The fact is that there are beause of Depression era banking laws and modern stupidities such as Sarbanes Oxley, there are more things to consider than just lending. If a banks capitalization falls too low, investors panic, sell, and it fails. If a bank doesn't have enough capital reserves to cover a specified percentage of assets, it fails. If value of assets fall to too low of a ratio as related to money lent out, it fails. It's not nearly as simple as people are trying to make it out to be.

 

Sure it would have been great to have years to reform things the way they should have been done since the 1930's, but the fact remains, that at the rate that major financial institutions were failing, there wasn't time to waste. It's not like we were talking about Mom and Pop's bank down the street. The 4th largest investment bank in the United States failed. Most other banks have assets with other banks to fulfill their own reserve requirements. Banks are very interconnected. If the largest banks on the planet were starting to fail, it was time for action. That seems pretty obvious to me anyway. The whole idea of all of these "regulations" that you keep referring to making some sort of a difference is a myth. Places all over the world that are MUCH more heavily regulated than the US have been failing or getting governmental bailouts. Britian, Iceland, France, German, and Russia are places that come to mind right away. Please tell me what exact regulation has most of the world been missing that would have prevented this?

I had posted earlier about this, and was in basic agreement with you. But I do want to actually give somewhat of an answer to your last question. There are some regulations that should be put in place, that have come to mind during this crisis. Here are a few ideas:

 

--The swaps market needs to be reigned in. Some of this capital from the bailout package should find its way to the LCH and CME Clearing, both of whom are working towards setting up a swap clearing house. This would be an immense help to stabilizing swaps risk and trading, and protecting assets. Further, regarding swaps, the rules as to valuation of swaps need to be standardized and more realistic. Buying protection on debt should NOT result in that debt being reflected as therefore risk free - that is a mirage. It would also be a good idea to require disclosure from banks and insurance companies as to how they are treating debt instruments as they pertain to the assets that are held on behalf of investors, shareholders and insurance clients.

 

--There needs to be more transparency into lending institutions, regarding their standards for lending at various risk levels. Generalized statistics can fairly easily be generated, which should be accessible publically, for lenders who lend to the public.

 

--The enforcement mechanisms in all the various financial agencies - SEC, CFTC, FRB, FDIC, etc. - need to be better funded and better trained. And there needs to be an enforcement mechanism that can look at ALL aspects of a given firm's financial risk as a total package. They can then report problems to people in power who can head off problems before they occur.

 

[mr_genius]

You seem to have the basic assumption that if the banks are going to use the money for anything else but lending, that is wrong. The fact is that there are beause of Depression era banking laws and modern stupidities such as Sarbanes Oxley, there are more things to consider than just lending. If a banks capitalization falls too low, investors panic, sell, and it fails. If a bank doesn't have enough capital reserves to cover a specified percentage of assets, it fails. If value of assets fall to too low of a ratio as related to money lent out, it fails. It's not nearly as simple as people are trying to make it out to be.

 

Sure it would have been great to have years to reform things the way they should have been done since the 1930's, but the fact remains, that at the rate that major financial institutions were failing, there wasn't time to waste. It's not like we were talking about Mom and Pop's bank down the street. The 4th largest investment bank in the United States failed. Most other banks have assets with other banks to fulfill their own reserve requirements. Banks are very interconnected. If the largest banks on the planet were starting to fail, it was time for action. That seems pretty obvious to me anyway. The whole idea of all of these "regulations" that you keep referring to making some sort of a difference is a myth. Places all over the world that are MUCH more heavily regulated than the US have been failing or getting governmental bailouts. Britian, Iceland, France, German, and Russia are places that come to mind right away. Please tell me what exact regulation has most of the world been missing that would have prevented this?

 

The issue here is two fold; both of which have no finite solution, we base our views on evidential theory and speculation. As much as you or I think we know the absolute answer to whether the current bailout structure was the best actions, it is impossible to know with complete certainty. I believe that more transparent account procedures, explicit regulations on the amount of risk a bank (which is publicly backed) can take, and detailed emergency plans should all be included in oversight. This would help protect investors and our financial systems. I think we went past the point of no return a while ago as far as banking institutions being absolute free market entities.

 

The second issue is that of public ownership and tax payer funds. I strongly believe that the taxation which we are financing these institutions also should include investor representation. These are no longer private institutions, they are public. Of course, the counter to my argument would be that elected representatives voted for this giveaway, therefore there is representation.

Edited October 30, 2008 by mr_genius

[southsider2k5]

I had posted earlier about this, and was in basic agreement with you. But I do want to actually give somewhat of an answer to your last question. There are some regulations that should be put in place, that have come to mind during this crisis. Here are a few ideas:

 

--The swaps market needs to be reigned in. Some of this capital from the bailout package should find its way to the LCH and CME Clearing, both of whom are working towards setting up a swap clearing house. This would be an immense help to stabilizing swaps risk and trading, and protecting assets. Further, regarding swaps, the rules as to valuation of swaps need to be standardized and more realistic. Buying protection on debt should NOT result in that debt being reflected as therefore risk free - that is a mirage. It would also be a good idea to require disclosure from banks and insurance companies as to how they are treating debt instruments as they pertain to the assets that are held on behalf of investors, shareholders and insurance clients.

 

--There needs to be more transparency into lending institutions, regarding their standards for lending at various risk levels. Generalized statistics can fairly easily be generated, which should be accessible publically, for lenders who lend to the public.

 

--The enforcement mechanisms in all the various financial agencies - SEC, CFTC, FRB, FDIC, etc. - need to be better funded and better trained. And there needs to be an enforcement mechanism that can look at ALL aspects of a given firm's financial risk as a total package. They can then report problems to people in power who can head off problems before they occur.

 

I have said for a long time that we need less agencies, and to get this type of regulation under one roof so that the various pieces of our financial puzzle are regulated by complimentary sets of rules that work together co-hesively instead of competeing with each other for budgets and attention. The system we have now, sucks. It has no flexiblity in it, nor ability to adjust to changing times and technologies. We wait until something breaks, and then the Congress over-reacts to fix it, so they can brag to voters that they did something.

 

[Texsox]

I have said for a long time that we need less agencies, and to get this type of regulation under one roof so that the various pieces of our financial puzzle are regulated by complimentary sets of rules that work together co-hesively instead of competeing with each other for budgets and attention. The system we have now, sucks. It has no flexiblity in it, nor ability to adjust to changing times and technologies. We wait until something breaks, and then the Congress over-reacts to fix it, so they can brag to voters that they did something.

 

that I understand.

[Balta1701]

Yay, more dirty little bailout secrets!

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

 

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

 

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

 

....

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

 

The change to Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers -- came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.

I so can't wait until these guys aren't running things any more.

[mr_genius]

Truth is the Democrats pushed for this bill hard and WERE in charge of the house and senate.

 

On another note, Dems push for automaker bailout.

 

http://www.ft.com/cms/s/0/1fc10c0e-ae63-11...0077b07658.html

 

and a bigger AIG bailout

 

and credit card bailout

 

all to fix a banking debacle they played a major role in. if you think the Democrats are any better on this stuff you're fooling yourself.

[lostfan]

Yeah the automaker bailout... no thanks. I was willing to swallow this banking bailout pill even if it was bitter but there's no reason we should be subsidizing the failures of the U.S. auto industry. If they want to, they can pay off my car note which will free that up for me to put elsewhere in the economy. /high5

[bmags]

FYI, if you want a comprehensive look at who is getting this money and when, I suggest ProPublica, a great investigative journalism non-profit site that has been doing an awesome job. http://propublica.org

[mr_genius]

Yeah the automaker bailout... no thanks. I was willing to swallow this banking bailout pill even if it was bitter but there's no reason we should be subsidizing the failures of the U.S. auto industry. If they want to, they can pay off my car note which will free that up for me to put elsewhere in the economy. /high5

 

haha how bout it.

 

the worst part is they were actually given money to make more fuel efficient cars years ago, during Clinton presidency. The basically didn't do anything that the money was supposed to be for, they insisted on SUV's and stuff. The Japanese companies thought the US automakers were getting an unfair advantage, but decided to double up efforts to make efficient automobiles. So basically, the US companies sucked, and the Japanese ones ended up destroying them in the market. Sometimes giving these companies money does nothing but encourage lazy, short sighted operations.

[lostfan]

haha how bout it.

 

the worst part is they were actually given money to make more fuel efficient cars years ago, during Clinton presidency. The basically didn't do anything that the money was supposed to be for, they insisted on SUV's and stuff. The Japanese companies thought the US automakers were getting an unfair advantage, but decided to double up efforts to make efficient automobiles. So basically, the US companies sucked, and the Japanese ones ended up destroying them in the market. Sometimes giving these companies money does nothing but encourage lazy, short sighted operations.

US auto was pretty much defeated fair and square in the free market by the superior Japanese companies. That really sucks for the people who make cars here, but for that, we need to blame the leadership (I use that term loosely) of these companies before we blame the politicians. The fact is that if these companies had foresight, we'd still have those jobs here in the States.

[mr_genius]

FYI, if you want a comprehensive look at who is getting this money and when, I suggest ProPublica, a great investigative journalism non-profit site that has been doing an awesome job. http://propublica.org

 

thanks for the link.

[NorthSideSox72]

Truth is the Democrats pushed for this bill hard and WERE in charge of the house and senate.

 

On another note, Dems push for automaker bailout.

 

http://www.ft.com/cms/s/0/1fc10c0e-ae63-11...0077b07658.html

 

and a bigger AIG bailout

 

and credit card bailout

 

all to fix a banking debacle they played a major role in. if you think the Democrats are any better on this stuff you're fooling yourself.

He wasn't talking about the bill - he was talking about what amounts to an XO by SecTreas.

 

Not that I am defending the bill OR the action, nor am I saying the GOP is any worse than the Dems on this. On this general subject, I don't see one party having screwed up significantly more than the other.

 

[mr_genius]

He wasn't talking about the bill - he was talking about what amounts to an XO by SecTreas.

 

Not that I am defending the bill OR the action, nor am I saying the GOP is any worse than the Dems on this. On this general subject, I don't see one party having screwed up significantly more than the other.

 

I actually blame the GOP a little more than the Democrats for this. But you're right, it's not a significant amount of additional blame.

Edited November 10, 2008 by mr_genius

[mr_genius]

http://www.bloomberg.com/apps/news?pid=206...refer=worldwide

 

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

 

of course. it's only 2 trillion dollars.

[southsider2k5]

http://www.bloomberg.com/apps/news?pid=206...refer=worldwide

 

 

 

of course. it's only 2 trillion dollars.

 

Nice. Its a sad day when my estimate of triple the original total has been matched in about a month.

[Balta1701]

Nice. Its a sad day when my estimate of triple the original total has been matched in about a month.

I'd say that the $2 trillion took quite a bit longer than a month. A large chunk of that has been the moneys that the Fed has dumped in over the past year.